Shares of Zenith Bank Plc took a major pounding after releasing impressive 2016 FY results. The bank had reported an impressive profit after tax of about N129. 6 billion, 26% higher than its 2015 results. This is the highest profit ever reported by a Nigerian Bank. The bank also proposed a final dividend of 177 kobo per share. All seemed well and good until the share price tanked.
Why share price dropped?
The bank followed up the results with an earnings call on Tuesday that apparently did not go down well with investors. According to analysts who listened in on the earnings call, the bank may have spooked investors after it mentioned plans to raise additional capital.
Investors are weary of banks requiring capital raise for two main reasons. Firstly, they believe it is indicative that things may not be all that good with the banks capital adequacy ratios, a sign that more impairments are likely this year. The bank already took a N30billion impairment on power sector loans in 2016 and as things stand, could take another N50 billion hit. It also took a N10 billion provision on oil and gas loans.
Secondly, raising equity capital will dilute shareholdings thus reducing the company’s earnings per share in the short to medium term. This means share price looks more likely to fall further than rise ahead of any capital raise.
One analysts wondered why Zenith Bank will be raising capital after declaring dividends that could cost the bank over N50 billion this year alone.
Most quoted companies are thought to have massive plans to raise capital this year to create buffers against rising risk assets and cost of doing businesses
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